You have been presented with the following draft financial information about Hivex, a very successful company that develops and licenses specialist computer software and hardware. Its fixed assets mainly consist of property, computer hardware and investments, and there have been additions to these during the year. The company is experiencing increasing competition from rival companies, most of which specialize in hardware or software, but not both. There is pressure to advertise and to cut prices. You are the audit manager. You are planning the audit, and you are conducting a preliminary analytical review and associated risk analysis for this client for the year ended 31 May 202X. You have been provided with a summarized draft Income Account (Figure 10.7), which has been produced very quickly, and certain accounting ratios and percentages. You have been informed that the company accounts for research and development costs in accordance with IAS 38 Intangible Assets.

Required:
(a) Using the information above, comment briefly on the performance of the company for the two years.
(b) Use your answer to part (a) to identify the areas that are subject to increased audit risk and describe the further audits work you would perform in response to those risks.

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FIGURE 10.7 Statement of Comprehensive Income year ended 31 May Sales Cost of sales Gross profit Distribution costs Administrative expenses Selling expenses Profit from operations Net interest receivable Profit before tax Corporation tax Net profit Dividends paid Retained profits Accounting ratios and percentages Earnings per share Performance ratios include the following: Gross margin Expenses as a percentage of sales: Distribution costs Administrative expenses Selling expenses Operating profit 202X £000s 15,206 3,009 12,197 3,006 994 3,002 5,195 995 6,190 3,104 3,086 1,469 1,617 0.43 0.80 0.20 0.07 0.20 0.34 202W £000s 13,524 3,007 10,517 1,996 1,768 274 6,479 395 6,874 1,452 5,422 1,439 3,983 1.04 0.78 0.15 0.13 0.02 0.48